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Rating Action:

Moody's places Infinis's ratings on review for downgrade

20 Jul 2015

London, 20 July 2015 -- Moody's Investors Service, (Moody's) has today placed on review for downgrade the Ba3 corporate family rating (CFR) of Infinis Energy Plc (Infinis), reflecting the weaker outlook for the company's credit profile following the recent decision by the UK government to remove the exemption for renewable power generators from the Climate Change Levy (CCL) tax.

"Our decision to place Infinis's ratings on review for downgrade reflects our expectation that the group's leverage could remain higher for longer in the context of a soft power price environment and following the negative consequences for the earnings of renewable power generators of the recent Summer Budget" said Matthew Huxham, a Moody's Assistant Vice President -- Analyst and lead analyst for Infinis. "Furthermore, equity and credit interests may not be aligned given the company's public strategy focussed on real dividend growth and capital expenditure".

At the same time, the rating agency also placed under review for downgrade the Ba2-PD probability of default rating (PDR) and the Ba3 rating on the GBP350 million senior notes due 2019 issued by the group's landfill gas generation business, Infinis Plc.

RATINGS RATIONALE

The rating review was prompted by the announcement by the UK Chancellor of the Exchequer, George Osborne, in the Summer Budget of 8 July 2015 of government's intention to remove the exemption of Renewable Source Energy from the CCL, a tax on energy use. Moody's expects that this policy decision will be implemented from August 2015, when the Finance Bill used to enact decisions set out in the Budget is likely to be passed into law. Moody's considers the change to be credit negative for all renewable electricity generators, as discussed in the recent publication "UK's Removal of Exemption from Energy Levy is Credit Negative for Renewable Generators".

Following implementation of the change, renewable electricity generators including Infinis will lose the ability to sell Levy Exemption Certificates (LECs) to energy users, which will result in the loss of around GBP5 per megawatt hour (MWh) generated. The rating agency considers that the loss of future earnings from the sale of LECs compounds the weakening impact of lower power prices on Infinis's credit profile. Approximately one half of Infinis's revenues are earned from the "brown" power price and while the company's contracting strategy provides it with short-term protection against volatility in the power price, Moody's expects that it will not protect the company against a persistently soft power price environment. The agency expects that the UK power price will remain low through 2020 with year average wholesale electricity prices of GBP42-46/MWh if gas prices remain stable, as discussed in the recent publication "In Britain, Falling Demand and New Capacity Will Squeeze Coal and Gas".

Moody's considers positively the company's strategy to invest in onshore wind assets, which will reduce its reliance on a declining landfill gas resource. However, the UK government has brought forward the commissioning deadline for new onshore wind projects to be eligible for the Renewables Obligation support scheme. This caused the company to accelerate its debt-funded investment programme, compounding the short-term impact on leverage of the exepected fall in earnings.

FACTORS TO BE CONSIDERED IN RATING REVIEW

Moody's rating review will focus on the ability and willingness of the group's management to take action which would mitigate the impact of reduced earnings on the group's credit profile.

The rating agency will endeavour to conclude the review within the next 60-90 days.

WHAT COULD CHANGE THE RATING UP/DOWN

The rating could be confirmed if Moody's concludes that Infinis's management will take sufficient steps to offset the impact on its credit profile of weaker future earnings and maintain credit quality at a level commensurate with the current rating with gearing of the Infinis Energy Plc group measured by debt to EBITDA likely peaking around 5.0x in 2017.

Conversely, the rating could be downgraded if such measures were not taken or if further regulatory changes were to occur in the meantime that would further erode the group's future earnings base, although the rating agency's base assumption is that this will not happen. Provided that no further negative regulatory changes occur during the period of the rating review, Moody's expects any downgrade as a result of the review to be limited to one notch.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Matthew Huxham
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places Infinis's ratings on review for downgrade
No Related Data.
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